Friday, February 19, 2010

Top 5 Graphs of the Week - 20 February 2010

This week we look at Japanese GDP figures which show an improving situation, poor performance in UK retail sales, a lift in UK inflation, a pause in US inflation, and the start of the US Federal Reserve testing the exit strategy waters in policy normalisation. So thematically I suppose we've got a bit of a growth and inflation slant this time.

Thus we've got what were for a time the 3 main financial centers in this article, where the growth situation is mixed; the UK really just struggling along, Japan benefiting from global trends in stimulus and presently largely artificial pick ups in demand, while the US is still in economic limbo - what happens when the stimulus is gone?

Meanwhile on the inflation front things are currently also largely mixed, the UK is probably the leader of the three on current inflation, while the US is a close second, and Japan is still in deflation. The risks to accelerating inflation are similar in the US and the UK, but as we'll see in the US the Fed has been making some promising moves towards preventing sowing the seeds of more powerful inflationary pressure in the years to come.

1. Japan GDP - thank you exports, thank you stimulus
Last week Japan released its GDP figures for Q4 2009; q/q it was up 1.1%, and above the expected 1%. However you need to be careful with that figure as they ended up revising down Q3 from about 1% to 0%... so the growth was shuffled forward I guess. Year on year the decreases reduced to a mere -0.90%, but overall GDP was down 5% for 2009 vs 2008. The main drivers of growth were private consumption (spurred on by stimulus measures), and a revival in net exports (helped by Chinese demand - in part stimulus related, and global demand from inventory restocking). The Japanese economy still remains firmly export oriented, and is set to gain from any improvement in international trade.

2. UK Retail Sales - another rainy day
UK retail sales disappointed in January with -1.8% month on month (against expected -0.5%), and up 0.9% year on year (against expected +1.1%). Now, much of the negative performance was related to bad weather (the index now includes fuel - so bad weather = less driving, less fuel consumption), but it would be hard to say that the result was completely weather driven. Overall this data point adds to the picture of an ailing UK economy, on a GDP basis, they've very barely left the recession with a minuscule +0.1% quarterly growth figure in Q4 2009, paired with the next chart, and my previous article on The Future of Public Debt (which shows the UK in an increasingly vulnerable position, things do not look good there indeed.

3. UK CPI - stagflation anyone?
UK CPI fell -0.2% on a monthly basis against expected 0%, on an annual basis it accelerated as expected to 3.5% vs 2.9% in December; core CPI also rose to a record 3.1% as expected. Much of the pressure is coming from the return of the VAT rate to 17.5% from 15%, a recovery in fuel prices, and a weak exchange rate. However, as with the temporary impact on retail sales above, it would be hard to argue that there isn't inflationary pressure working away here somewhere. Indeed the conditions e.g. quantitative easing, can only be facilitative of increasing inflation, for now at least, the situation is high inflation (and even though the factors can be explained - prices are still rising), and low growth...

4. US CPI - fuel up shelter down
Over in the US, the CPI figures came in slightly weaker - allowing the deflation hawks some ammunition. Headline CPI rose 0.2% against expected 0.3% month on month, and up 2.7% year on year. Core CPI actually fell -0.1% vs consensus +0.1% on a monthly basis, and eased back to 1.5% on an annual basis. Upward pressure is still coming through from fuel prices, but these were slightly offset by a drop in shelter costs (helped by hotels and resorts dropping prices to try and drum up some business - makes sense given the large stock of hotels coming through the pipeline that were started back before the crisis). Overall the outlook for inflation in the US is probably for reasonably stable for an extended period - but with risks to the upside dominating.

5. US Federal Reserve - Testing the exit strategy waters...
The US surprised markets, and me, when it made it's Thursday after-market-close announcement that it had decided to increase the primary credit rate (discount rate) by 25bps to 0.75%, and that it would also increase the minimum bid rate on TAF auctions to 0.5% (though it also highlighted that final the TAF auction will be on March 8, 2010). As you can see in the chart below it marks an increase from record low levels, it also brings the spread between the discount rate and the fed funds rate back up slightly (but still below where it usually is). Most commentators pitched it as a normalisation of the rate at which banks borrow money from the Fed. My spin is that this is the first steps in testing the exit strategy waters - at some point they will need to exit the stimulus measures and return to neutral (otherwise the CPI chart above will start to look a bit scary), so in that respect this is a positive move.

To sum up, there's a tentative economic recovery underway in Japan that will only be helped by any further improvements in international trade. While in the UK signs are that the very weak economic recovery there may stall; in any case the growth situation is weak at best, and inflation is picking up; leaving you with stagflation. In the US, inflation has continued to show signs of picking up, but has taken somewhat of a breather this time, and while inflation risks are low, they are weighted to the upside.

2. UK Office for National Statistics
3. UK Office for National Statistics
4. US Bureau of Labor Statistics
5. US Federal Reserve

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